Dear Modi sarkar, what about domestic black money?

narendra_modi
The Lok Sabha passed the Undisclosed Foreign Income and Assets (Imposition of New Tax) Bill, 2015 or the foreign black money Bill, yesterday. The ministry of finance 2012 white paper on black money defines black money as: “any income on which the taxes imposed by government or public authorities have not been paid.” The wealth that has been accumulated in this way “may consist of income generated from legitimate activities or activities which are illegitimate per se, like smuggling, illicit trade in banned substances, counterfeit currency, arms trafficking, terrorism, and corruption,” the white paper goes on to suggest.
Of course this wealth that has been accumulated through tax evasion has “neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession.”
Some portion of this black money over the years has managed to escape the Indian shores and has been invested abroad. An estimate made by Washington-based research and advocacy group Global Financial Integrity in a report titled Illicit Financial Flows from Developing Countries: 2003-2012, suggests that around $439.6 billion of black money left the Indian shores, between 2003 and 2012. Through the foreign black money Bill the government is attempting to get this money back.
Also, given the penal provisions of the Bill, an attempt is being made to ensure that in the days to come, citizens pay tax on their income, instead of accumulating it as black money and then transferring it abroad.
As the finance minister Arun Jaitley put it yesterday: “All those who keep money outside — time is running out for them as the world is moving to an automatic information exchange and soon, when that is available, they will be penalised for their action.”
And what are these penalties like? The Bill states that undisclosed foreign income as well as assets will be taxed at the rate of 30%, without allowing for any exemptions or deductions which are allowed under the Income-Tax Act, 1961. This will be accompanied by a penalty equal to three times the amount of tax. Hence, the tax and penalty on undisclosed overseas income as well as assets can amount to as much as 120% (30% + 90%). Further, the amount of tax to be paid on foreign assets will be computed on the basis of its current market price and not the price at which it was bought.
Nevertheless, there is a way out of this. After the Bill becomes an Act, the government will offer a short compliance window, which will allow those with undisclosed foreign assets and income to declare them, pay a tax of 30% and a penalty of 30%.
The Bill also has a provision which allows the government to charge a penalty of Rs 10 lakh for the inaccurate disclosure of foreign assets, along with a rigorous imprisonment of six months to seven years, the first time around. Second and subsequent offences are punishable with fines of Rs 25 lakh to Rs 1 crore and a rigorous imprisonment three to 10 years.
On the face of it, the Bill seems like an honest attempt to crack down on black money that has already left the country and that might leave the country in the days to come. But there are several questions that crop up here.
Why is a short compliance window being offered? It makes the taxpayers who have been honestly declaring their foreign income as well as assets till date, look a tad stupid. Just because someone is willing to pay a fine of 30% and declare his foreign assets, does that make his less guilty? Or is this another tax amnesty scheme in disguise being offered by the government?
Further, why is there a distinction being made between domestic and foreign black money? The definition of black money in the ministry of finance white paper does not make any distinction between black money in the country and black money that has left the shores. Ultimately, almost all black money originates in the country, when people earn an income and do not pay a tax on it. So why is this artificial distinction being made? Why couldn’t the government have come up with a law which covered both domestic as well as foreign black money? Its now been in office for close to one year.
The answer perhaps lies in the way political funding works in this country. An analysis carried out by the National Election Watch and Association of Democratic Reforms reveals that during the period 2004-2005 and 2011-12, the total income of the national political parties was Rs. 4,899.46 crores. The Congress party declared the highest income of Rs 2,365.02 crores. It was followed by the Bhartiya Janata Party which declared an income of Rs 1,304.22 crores.
Between 2004-05 and 2011-12, there were two Lok Sabha elections(in 2004 and 2009) and multiple state assembly elections. It doesn’t take rocket science to come to the conclusion that the amount of donations declared by the political parties were clearly not enough to fight so many elections.
Within 90 days of completion of the General Elections, political parties are required to submit their election expenditure to the Election Commission of India. The National Election Watch and Association of Democratic Reforms has analysed this expenditure for the last Lok Sabha election and it makes for a very interesting reading. This expenditure statement contains the “details of the total amount received as funds in the form of cash, cheques and demand drafts and the total amount spent under various heads.”
The total amount of funds collected by national political parties for the 2014 Lok Sabha election was at Rs 1158.59 crores. This was 35.5% higher than the funds collected for the 2009 Lok Sabha elections. The total declared expenditure of the national political parties was Rs 1308.75 crore, up by 49.4% from 2009.
Now compare this to an estimate made by the Centre for Media Studies in March 2014. It estimated that around Rs 30,000 crore would be spent during the 16th Lok Sabha elections which happened in April and May 2014. Of this amount, the government would spend around Rs 7,000-8,000 crore to conduct the elections. The remaining amount of around Rs 22,000-23,000 crore would be spent by the candidates fighting the elections.
Of course, national political parties are not the only parties fighting elections. Nevertheless, the difference between the officially declared expenditure and the ‘real’ expenditure to fight elections, is huge. Where does this money come from? The domestic black money essentially finances political parties and in the process elections in India. And given this, no government(and political party) can really go after it. Meanwhile, they will keep talking about foreign black money.

Moral of the story—You don’t kill the goose that lays golden eggs.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on DailyO on May 12, 2015

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

One Response to Dear Modi sarkar, what about domestic black money?

  1. Domestic black money is several times more.1.with changes in laws pertaining to long term capital gains it can be brought in circulation.Realestate business,a big area of hiding black money should reviewed.If long term capital gains by selling properties are allowed to be invested in more than one residential/commercial / agriculture units,more transactions will take place in accounted money.2. Voluntary disclosure ,once and last opportunity be given. Say, disclose with 20percent taxability ,provided remaining money be deposited in banks @4percent interest for five years,with permissible loan against this money as security,on usual rates. Colossal amount of undisclosed black money will be put in circulation.

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